Understanding Basic Contracts: Terminating for Material Breach

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All contracts will have a term (length of the agreement) and termination (how you terminate the agreement) clause. Well, they should have a termination clause. As I wrote last time, it’s important to take great care in reviewing your contracts before executing them.

Let’s take a look at typical termination clauses. There are two basic types of terminations: (1) termination for convenience, and (2) termination for cause.

A typical termination for convenience clause looks like this:

Termination for Convenience. Either Party may terminate this Agreement for convenience upon 90 days’ advance written notice.

Usually the notice period is pretty long, which makes sense given the nature of the termination. Each party may have invested significant time and money in preparing and executing the contract, so it wouldn’t be right if the other party can terminate at any time. Though it’s not uncommon to have “terminate at anytime” termination clauses (for example, your gym contract probably allows you to terminate it at anytime). Make sure you think through an appropriate notice period for a termination for convenience in light of the type of contract and investment of the parties.

But what I really want to discuss today is termination for cause. Here’s a termination for cause provision that you might see:

Termination for Cause. Either Party may terminate this Agreement for cause in the event of a material breach of this Agreement, provided that the non-breaching Party must provide written notice of the material breach and a thirty (30) day cure period.

Under this language, there are three conditions which must occur prior to termination for cause:

  1. Material breach
  2. Written notice
  3. A thirty day cure period

Let’s break these down. Notice that “material breach” is not capitalized, thus it’s not likely to be a defined term in the contract. So it may be a bit ambiguous as to what kind of breach is material, and what is not. But this ambiguity could help if you’re the breaching party. For example, if a certain report under the agreement is supposed to be delivered by the 5th of each month, and one month the 5th is a Sunday and the report is delivered on the 6th, that may not be material. On the other hand, if the reports are late every month for several months, that would likely qualify as “material.” Understand that situations like this are not always clear cut – the facts and circumstances will be germane to each case.

“Written” notice is pretty simple to interpret; be sure sure that email qualifies as written notice (likely to be in the “Notice” section). In the old days (like a few years ago), most contracts required delivery by mail to satisfy “Notice” requirements.

Finally, a [thirty] day cure period. This means that the breaching party gets time to cure whatever issue has arisen. I The non-breaching party provides written notice describing the material breach, and then the breaching party gets thirty days to cure the issue. I’m putting [thirty] in brackets to let you know that this time period is fungible – it’s to be negotiated. Agree on a reasonable number that would give the breaching party time to cure, but also not disrupt the business goals of the agreement.

In closing, work with your attorney to insert beneficial termination clauses. Provided you are holding up your end of the contract, quick trigger termination clauses will be to your benefit – so that you can terminate quickly when the other party isn’t performing as agreed.

Posted in: General Business
About the Author
Kevin Vela

Kevin is the managing partner at Vela Wood. He focuses his practice in the areas of venture financing, M&A, fund representation, and gaming law.

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